China "Faces The Worst Of Both Worlds" As PPI Deflation Arrives While Food Inflation Soars

As if China did not have its hands full with a trade war, a plunging yuan and growing civil unrest in Hong Kong, which is fast becoming the potential epicenter for the next global crisis (and which Steve "The Big Short" Eisman thinks is the next black swan), it now also has deflation to worry about at a time when its ability to boost liquidity in the system is severely limited... or maybe it's soaring inflation China should be concerned about.

On Friday, China's National Bureau of Statistics reported that the Producer Price Index (PPI), i.e. factory prices, fell 0.3% in July from a year ago, missing the modest 0.1% decline expected by analysts. This was the first annual decline in China's PPI in three years - since August 2016 - and just like back then, was largely the result of tumbling commodity prices which in turn depressed both manufacturing and raw material goods prices. And with oil sliding, and iron ore plunging, not to mention the whole trade war thing, it does not seems like a rebound is imminent at all. 

Worse, since PPI is closely linked to corporate profitability, the decline suggests that China is badly lagging in the credit impulse arena despite having started off 2019 with a bang and some of the biggest increases in Total Social Financing on record.

So what's the big deal: China has always been able to boost inflation, all it had to do was turn on the credit spigot and inject a few trillion in new bank and shadow loans into the economy.

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